rightly assert that a separate system of state banks ‘‘allows the states to serve
as laboratories for innovation and change, not only in bank powers and
structures, but also in the area of consumer protection.’’ State banks’ super-
visors argue that state banks put in action the ‘‘smaller is better’’ model of
business. State banks are in general geographically closer to state bank regu-
lators. This provides state banks with greater access to state regulators and
gives state regulators greater familiarity with the banks they supervise.
National banks are required by law to become members of the Federal
Reserve System. Banks chartered by the states are divided into those that are
members of the Federal Reserve system (state member banks) and those that
are not (state nonmember banks). State banks are not required to join the
Federal Reserve system, but they may elect to become members if they meet
the standards set by the Board of Governors of the Federal Reserve System.
As of 2007, of the nation’s approximately 8,441 commercial banks, ap-
proximately 2,459 were members of the Federal Reserve System. Member
banks must subscribe to stock in their regional Federal Reserve Bank in an
amount equal to 6 percent of their capital and surplus, half of which must
be paid in while the other half is subject to call by the Board of Governors of
the Federal Reserve System. The holding of this stock, however, does not
carry with it the control and financial interest conveyed to holders of com-
mon stock in for-profit organizations. It is merely a legal obligation of Fed-
eral Reserve membership, and the stock may not be sold or pledged as
collateral for loans. Member banks receive a 6 percent dividend annually
on their stock, as specified by law, and vote for the Class A and Class B
directors of the Reserve Bank. Stock in Federal Reserve Banks is not availa-
ble for purchase by individuals or entities other than member banks. The
Federal Reserve is responsible for supervising and regulating the following
segments of the banking industry to ensure safe and sound banking prac-
tices and compliance with banking laws: (1) bank holding companies,
including diversified financial holding companies formed under the
Gramm-Leach-Bliley Act of 1999 and foreign banks with U.S. operations;
(2) state-chartered banks that are members of the Federal Reserve System
(state member banks); (3) foreign branches of member banks; (4) edge and
agreement corporations, through which U.S. banking organizations may
conduct international banking activities. Details of the Federal Reserve sys-
tem are found in Chapter 5.
Credit Unions
There is yet another type of depository institution in the United States that is
very close to savings cooperatives. These are calledcredit unions. These are
associations of members of a community that are bound together either
The Conventional Riba-Based Banking System 159